The short and long of personal loans

We have all been in situations where we have found ourselves in need of money. In school or colleges we could probably borrow it from our friends or family, but there are bound to be instances where our near ones are not in a position to financially bail us out. Most of us choose to rely on banks to help us during these testing times, with a number of loans available based on our need. One of the most popular option available in the market is that of a personal loan.

Today, getting a personal loan is not very hard. Sure, banks do have certain criteria, but someone who has good control over his/her financial past is likely to get the loan sanctioned without hassle. While there is no doubt that a loan can be a lifesaver, most of us are in a hurry to get the money, often miscalculating things or making silly mistakes.

We all know that the loan we borrow today has to be repaid at some point of time, but do we really take a few minutes to analyse the importance of this time period? Lenders offer personal loans for periods ranging from a year to 5 years, with the ultimate choice down to us. One might wonder as to whether the repayment term makes any difference, for the same amount has to be paid back ultimately, right? True, we are paying the same principal amount, but the loan repayment tenure can make a difference when it comes to the actual interest being paid.

Short-term personal loan
A short-term loan, in general, is any loan with a tenure of 1 year. Most personal loans fall under short-term loans. A critical aspect most of us look at before taking a loan is the interest rate. Personal loan interest rate is typically on the higher side, given the fact that these loans are unsecured in nature. The actual interest rate payable, however, is computed after taking the loan term into account. Most lenders in India currently offer personal loans at an interest ranging between 12% p.a. and 20% p.a.

A number of lenders offer a lower rate of interest for short-term loans. This is because the risk of non-payment of a loan typically increases over time. A shorter repayment tenure can reduce the risk of loan defaults.

In addition to lower interest rates, short-term loans are also easier to get. Banks can sanction these loans in a single working day, which makes a short tenure an ideal option for those in urgent need of money. But before you do go out and make plans as to what you intend to do with the money, ensure that you check your personal loan eligibility , for banks can reject a loan application if you don’t meet their expectations.

Long-term personal loan
A long-term loan, in general, is any loan with a tenure of over 3 years. Given the fact that lenders in India offer personal loans with a tenure upto 5 years, one can categorise a personal loan as long-term. Most individuals opt for long-term repayment tenure for home loans, given the high loan amount associated with such loans.

The interest rate for such loans is typically higher, which means that you end up paying more from your pocket. One smart way to check your repayment obligation is to use a personal loan EMI calculator . These calculators provide an EMI estimate based on the loan amount, the tenure, interest rate, etc. This can help plan the repayment even before the loan is availed.

Long-term loans are mostly availed against collateral. The most popular long-term loans in India are home loans. Given the fact that there is no collateral involved in a personal loan, it takes time to get a personal loan with an extended tenure sanctioned. Banks are cautious and might take a number of factors into consideration before sanctioning the loan.

What should you choose?
The ultimate choice of choosing the loan tenure boils down to your current status. Choose a shorter tenure if you are in a position to repay the loan within the time period. If you have other commitments and think that it might be hard to repay the loan within a year choose a longer period. Also, the urgency should be considered. If you are in an urgent need of cash it makes sense to apply for a short-term loan. The interest repayment is also another extremely crucial factor which should be kept in mind. Long-term loans typically result in more interest payable, so if you have the means choose a shorter term.

Regardless of what term you choose, what you should remember is that a personal loan is extremely handy during emergencies, and choosing the right tenure can help you save money, in addition to boosting your credit score..